I point will be reached when traders say - it must be time to buy again. Some wind has been taken out of the market, but oil is still the most important commodity on the earth. So when might we expect oil prices to bottom. Well its still a little time off. Certainly we are not returning to the bad old days of the 1990s when commodities were under-appreciated. Oil will trade in a new, higher range. We will not see oil prices return to $9/barrel when there are large emerging markets like China and India around, and a large number of SUVs with a useful life of 15 years.
Oil prices are going back to around $US77.50s, though I would argue traders could take it as low as $70/barrel in volatile intra-day trading. I do however think there will be some resistance on the downside around $97-100/barrel. There are 2 reasons for this:
1. A weaker oil price is likely to give equity markets encouragement
2. People's standard of living expectations will adjust, resulting in an improvement in consumer confidence. Not everyone went out and bought a 2nd house, and speculated on US property. But some people did, and some people did buy at the top, fearing they were going to miss out.
3. Lower oil prices will give consumers more money to go out and spend
Nevertheless I don't see the market fully recovering for a while yet, but I do think the next 6 months will yield some stock bargains, particularly with property foreclosures and commodities. I think the nickel market will be the first to recover, followed by gold. The other metals will likely take a bit more convincing.
So the target price is $US77 level for a bottom in oil prices. This is a strong support having been resistance, though I have some suspicion that oil might fall to $70/barrel in the short term, so there is some reason to be cautious trading that position in order to get the best entry.
Andrew Sheldon www.sheldonthinks.com